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The uncertainty created by Trump’s erratic policymaking could not have come at a worse time for the industry.
This is the second story in a Heatmap series on the “green freeze” under Trump.
Climate tech investment rode to record highs during the Biden administration, supercharged by a surge in ESG investing and net-zero commitments, the passage of the Infrastructure Investment and Jobs Act and Inflation Reduction Act, and at least initially, low interest rates. Though the market had already dropped somewhat from its recent peak, climate tech investors told me that the Trump administration is now shepherding in a detrimental overcorrection. The president’s fossil fuel-friendly rhetoric, dubiously legal IIJA and IRA funding freezes, and aggressive tariffs, have left climate tech startups in the worst possible place: a state of deep uncertainty.
“Uncertainty is the enemy of economic progress,” Andrew Beebe, managing director at Obvious Ventures, told me.
The lack of clarity is understandably causing investors to throw on the brakes. “We’ve talked internally about, let’s be a little bit more cautious, let’s be a little more judicious with our dollars right now,” Gabriel Kra, co-founder at the climate tech firm Prelude Ventures, told me. “We’re not out in the market, but I would think this would be a really tough time to try and go out and raise a new fund.”
This reluctance comes at a particularly bad time for climate tech startups, many of which are now reaching a point where they are ready to scale up and build first-of-a-kind infrastructure projects and factories. That takes serious capital, the kind that wasn’t as necessary during Trump’s first term, or even much of Biden’s, when many of these companies were in a more nascent research and development or proof-of-concept stage.
I also heard from investors that the pace of Trump’s actions and the extent of the economic upheaval across every sector feels unique this time around. “We’re entering a pretty different economic construct,” Beebe told me, citing the swirling unknowns around how Trump’s policies will impact economic indicators such as inflation and interest rates. “We haven’t seen this kind of economic warfare in decades,” he said.
Even before Trump took office, it was notoriously difficult for climate companies to raise funding in the so-called “missing middle,” when startups are too mature for early-stage venture capital but not mature enough for traditional infrastructure investors to take a bet on them. This is exactly the point at which government support — say, a loan guarantee from the Department of Energy’s Loan Programs Office or a grant from the DOE’s Office of Clean Energy Demonstrations — could be most useful in helping a company prove its commercial viability.
But now that Trump has frozen funding — even some that’s been contractually obligated — companies are left with fewer options than ever to reach scale.
One investor who wished to remain anonymous in order to speak more openly told me that “a lot of the missing middle companies are living in a dicier world.” A 2023 white paper on “capital imbalances in the energy transition” from S2G Investments, a firm that supports both early-stage and growth-stage companies, found that from 2017 to 2022, only 20% of climate capital flowed toward companies at this critical inflection point, while 43% went to early-stage companies and 37% towards established technologies. For companies at this precarious growth stage, a funding delay on the order of months could be the difference between life and death, the investor added. Many of these companies may also be reliant on debt financing, they explained. “Unless they’ve been extremely disciplined, they could run into a situation where they’re just not able to service that debt.”
The months or even years that it could take for Trump’s rash funding rescission to wind through the courts will end up killing some companies, Beebe told me. “And unfortunately, that’s what people on the other side of this debate would like, is just to litigate and escalate. And even if they ultimately lose, they’ve won, because startups just don’t have the balance sheets that big companies would,” he explained.
Kra’s Prelude Ventures has a number of prominent companies in its portfolio that have benefitted from DOE grants. This includes Electric Hydrogen, which received a $43.3 million DOE grant to scale electrolyzer manufacturing; Form Energy, which received $150 million to help build a long-duration battery storage manufacturing plant; Boston Metal, which was awarded $50 million for a green steel facility; and Heirloom, which is a part of the $600 million Project Cypress Direct Air Capture hub. DOE funding is often doled out in tranches, with some usually provided upfront and further payments tied to specific project milestones. So even if a grant has officially been awarded, that doesn’t mean all of the funding has been disbursed, giving the Trump administration an opening to break government contracts and claw it back.
Kra told me that a few of his firm’s companies were on the verge of securing government funding before Trump took office, or have a project in the works that is now on hold. “We and the board are working closely with those companies to figure out what to do,” he told me. “If the mandates or supports aren’t there for that company, you’ve got to figure out how to make that cash last a bunch longer so you can still meet some commercially meaningful milestones.”
In this environment, Kra said his firm will be taking a closer look at companies that claim they will be able to attract federal funds. “Let’s make sure we understand what they can do without that non-dilutive capital, without those grants, without that project level support,” he told me, noting that “several” companies in his portfolio will also be impacted by Trump’s ever-changing tariffs on imports from Canada, Mexico, and China. Prelude Ventures is working with its portfolio companies to figure how to “smooth out the hit,” Kra told me later via email, but inevitably the tariffs “will affect the prices consumers pay in the short and long run.”
While investors can’t avoid the impacts of all government policies and impulses, the growth-stage firm G2 Venture Partners has long tried to inoculate itself against the vicissitudes of government financing. “None of our companies actually have any exposure to DOE loans,” Brook Porter, a partner and co-founder at G2, told me in an email, nor have they received government grants. If you add up the revenue from all of the companies in G2’s portfolio, which is made up mainly of sustainability-focused startups, only about 3% “has any exposure to the IRA,” Porter told me. So even if the law’s generous clean energy tax credits are slashed or the programs it supports are left to languish, G2’s companies will likely soldier on.
Then there are the venture capitalists themselves. Many of the investors I spoke with emphasized that not all firms will have the ability or will to weather this storm. “I definitely believe many generalist funds who dabbled in climate will pull back,” Beebe told me. Porter agreed. “The generalists are much more interested in AI, then I think in climate,” he said. It’s not as if there’s been a rash of generalist investors announcing pullbacks, though Kra told me he knows of “a couple of firms” that are rethinking their climate investment strategies, potentially opting to fold these investments under an umbrella category such as “hard tech” instead of highlighting a sectoral focus on energy or climate, specifically.
Last month, the investment firm Coatue, which has about $70 billion in assets under management, raised around $250 million for a climate-focused fund, showing it’s not all doom and gloom for the generalists’ climate ambitions. But Porter told me this is exactly the type of large firm he wouldexpect to back out soon, citing Tiger Global Management and Softbank as others that started investing heavily during climate tech’s boom years from 2020 to 2022 that he could imagine winding down that line of business.
Strategic investors such as oil companies have also been quick to dial back their clean energy ambitions and refocus their sights on the fossil fuels championed by the Trump administration. “Corporate venture is very cyclical,” Beebe told me, explaining that large companies tend to make venture investments when they have excess budget or when a sector looks hot, but tighten the purse strings during periods of uncertainty.
But Cody Simms, a managing partner at the climate tech investment firm MCJ, told me that at the moment, he actually sees the corporate venture ecosystem as “quite strong and quite active.” The firm’s investments include the low-carbon cement company Sublime Systems, which last year got strategic backing from two of the world’s largest building materials companies, and the methane capture company Windfall Bio, which has received strategic funding from Amazon’s Climate Pledge Fund. Simms noted that this momentum could represent an overexuberance among corporations who just recently stood up their climate-focused venture arms, and “we’ll see if it continues into the next few years.”
Notably, Sublime and Windfall Bio both also have millions in DOE grants, and another of MCJ’s portfolio companies, bio-based chemicals maker Solugen, has a “conditional commitment” from the LPO for a loan guarantee of over $200 million. Since that money isn’t yet obligated, there’s a good chance it might never actually materialize, which could stall construction on the company’s in-progress biomanufacturing facility.
Simms told me that the main thing he’s encouraging MCJ’s portfolio companies to do at this stage is to contact their local representatives — not to advocate for climate action in general, but rather “to push on the very specific tax credit that they are planning to use and to talk about how it creates jobs locally in their districts.”
Getting startups to shift the narrative away from decarbonization and climate and toward their multitudinous co-benefits — from energy security to supply chain resilience — is of course a strategy many are already deploying to one degree or another. And investors were quick to remind me that the landscape may not be quite as bleak as it appears.
“We’ve made more investments, and we have a pipeline of more attractive investments now than we have in the last couple of years,” Porter told me. That’s because in spite of whatever havoc the Trump administration is wreaking, a lot of climate tech companies are reaching a critical juncture that could position the sector overall for “a record number of IPOs this year and next,” Porter said. The question is, “will these macro uncertainties — political, economic, financial uncertainty — hold companies back from going public?”
As with so many economic downturns and periods of instability, investors also see this as a moment for the true blue startups and venture capitalists to prove their worth and business acumen in an environment that’s working against them. “Now we have the hardcore founders, the people who really are driven by building economically viable, long-term, massively impactful companies, and the investors who understand the markets very well, coming together around clean business models that aren’t dependent on swinging from one subsidy vine to the next subsidy vine,” Beebe told me.
“There is no opportunity that’s an absolute no, even in this current situation, across the entire space,” the anonymous climate tech investor told me. “And so this might be one of the most important points — I won’t say a high point, necessarily — but it might be a moment of truth that the energy transition needs to embrace.”
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Empire Wind has been spared — but it may be one of the last of its kind in the U.S.
It’s been a week of whiplash for offshore wind.
On Monday, President Trump lifted his stop work order on Empire Wind, an 810-megawatt wind farm under construction south of Long Island that will deliver renewable power into New York’s grid. But by Thursday morning, Republicans in the House of Representatives had passed a budget bill that would scrap the subsidies that make projects like this possible.
The economics of building offshore wind in the U.S., at least during this nascent stage, are “entirely dependent” on tax credits, Marguerite Wells, the executive director of Alliance for Clean Energy New York, told me.
That being said, if the bill gets through the Senate and becomes law, Empire Wind may still be safe. The legislation would significantly narrow the window for projects to qualify for tax credits, requiring them to start construction by the end of this year and be operational by the end of 2028. Equinor, the company behind Empire Wind, maintains that it aims to reach commercial operations as soon as 2027. The four other offshore wind projects that are under construction in the U.S. — Sunrise Wind, also serving New York; Vineyard Wind, serving Massachusetts; Revolution Wind, serving Rhode Island and Connecticut; and Dominion Energy’s project in Virginia — are also expected to be completed before the cutoff.
Together, the five wind farms are expected to generate enough power for roughly 2.5 million homes and avoid more than 9 million tons of carbon emissions each year — similar to shutting down 23 natural gas-fired power plants.
Still, this would represent just a small fraction of the carbon-free energy eastern states are counting on offshore wind to provide. New York, for example, has a statutory goal of getting at least 9 gigawatts of power from the industry. Once Empire and Sunrise are completed, it will have just 1.7 gigawatts.
If the proposed changes to the tax credits are enacted, these five projects may be the last built in the U.S.
That’s not the case for solar farms or onshore wind, Oliver Metcalfe, head of wind research at BloombergNEF told me. They can still compete with fossil fuel generation — especially in the windiest and sunniest areas — without tax credits. That’s especially true in today’s environment of rising demand for power, since these projects have the additional benefit of being quick to build. The downside of losing the tax credits is, of course, that the power will cost marginally more than it otherwise would have.
For offshore wind farms to pencil out, however, states would have to pay a much higher price for the energy they produce. The tax credits knock off about a quarter of the price, Metcalfe said; without them, buyers will be back on the hook. “It’s likely that some either wouldn’t be willing to do that, or would dramatically decrease their ambition around the technology given the potential impacts it could have on ratepayers.”
Part of the reason offshore wind is so expensive is that the industry is still new in the U.S. We lack the supply chains, infrastructure, and experienced workforce built up over time in countries like China and the U.K. that have been able to bring costs down. That’s likely not going to change by the time these five projects are built, as they are all relying on European supply chains.
The Inflation Reduction Act spurred domestic manufacturers to begin developing supply chains to serve the next wave of projects, Wells told me. It gave renewable energy projects a 10-year runway to start construction to be eligible for the tax credits. “It was a long enough time window for companies to really invest, not just in the individual generation projects, but also manufacturing, supply chain, and labor chain,” she said.
Due to Trump’s attacks on the industry, the next wave of projects may not materialize, and those budding supply chains could go bust.
Trump put a freeze on offshore wind permitting and leasing on his first day in office, a move that 17 states are now challenging in court. A handful of projects are already fully permitted, but due to uncertainty around Trump’s tariffs — and now, around whether they’ll have access to the tax credits — they’re at a standstill.
“No one’s willing to back a new offshore wind project in today’s environment because there’s so much uncertainty around the future business case, the future subsidies, the future cost of equipment,” Metcalfe said.
The House budget bill may have kept the 45Q tax credit, but nixing transferability makes it decidedly less useful.
Very few of the Inflation Reduction Act’s tax credits made it through the House’s recently passed budget bill unscathed. One of the apparently lucky ones, however, was the 45Q credit for carbon capture projects. This provides up to $180 per metric ton for direct air capture and $85 for carbon captured from industrial or power facilities, depending on how the CO2 is subsequently sequestered or put to use in products such as low-carbon aviation fuels or building materials. The latest version of the bill doesn’t change that at all.
But while the preservation of 45Q is undoubtedly good news for the increasing number of projects in this space, carbon capture didn’t escape fully intact. One of the main ways the IRA supercharged tax credits was by making them transferable, turning them into an important financing tool for small or early-stage projects that might not make enough money to owe much — or even anything — in taxes. Being able to sell tax credits on the open market has often been the only way for smaller developers to take advantage of the credits. Now, the House bill will eliminate transferability for all projects that begin construction two years after the bill becomes law.
That’s going to make the economics of an already financially unsteady industry even more difficult. “Especially given the early stage of the direct air capture industry, transferability is really key,” Giana Amador, the executive director of an industry group called the Carbon Removal Alliance, told me. “Without transferability, most DAC companies won’t be able to fully capitalize upon 45Q — which, of course, threatens the viability of these projects.”
We’re not talking about just a few projects, either. We’re talking about the vast majority, Jessie Stolark, the executive director of another industry group, the Carbon Capture Coalition, told me. “The initial reaction is that this is really bad, and would actually cut off at the knees the utility of the 45Q tax credit,” Stolark said. Out of over 270 carbon capture projects announced as of today, Stolark estimates that fewer than 10 will be able to begin construction in the two years before transferability ends.
The alternative to easily transferable tax credits is a type of partnership between a project developer and a tax equity investor such as a bank. In this arrangement, investors give project developers cash in exchange for an equity stake in their project and their tax credit benefits. Deals like this are common in the renewable energy industry, but because they’re legally complicated and expensive, they’re not really viable for companies that aren’t bringing in a lot of revenue.
Because carbon capture is a much younger, and thus riskier technology than renewables, “tax equity markets typically require returns of 30% or greater from carbon capture and direct air capture project developers,” Stolark told me. That’s a much higher rate than tax equity partners typically require for wind or solar projects. “That out of the gate significantly diminishes the tax credit's value.” Taken together with inflation and high interest rates, all this means that “far fewer projects will proceed to construction,” Stolark said.
One DAC company I spoke with, Bay Area-based Noya, said that now that transferability is out, it has been exploring the possibility of forming tax equity partnerships. “We’ve definitely talked to banks that might be interested in getting involved in these kinds of things sooner than they would have otherwise gotten involved, due to the strategic nature of being partnered with companies that are growing fast,” Josh Santos, Noya’s CEO, told me.
It would certainly be a surprise to see banks — which are generally quite risk averse — lining up behind these kinds of new and unproven technologies, especially given that carbon capture doesn’t have much of a natural market. While CO2 can be used for some limited industrial purposes — beverage carbonation, sustainable fuels, low-carbon concrete — the only market for true carbon dioxide removal is the voluntary market, in which companies, governments, or individuals offset their own emissions by paying companies to remove carbon from the atmosphere. So if carbon capture is going to become a thriving, lucrative industry, it’s likely going to be heavily dependent on future government incentives, mandates, or purchasing commitments. And that doesn’t seem likely to happen in the U.S. anytime soon.
Noya, which is attempting to deploy its electrically-powered, modular direct air capture units beginning in 2027, is still planning on building domestically, though. As Santos told me, he’s eyeing California and Texas as promising sites for the company’s first projects. And while he said that the repeal of transferability will certainly “make things more complicated,” it is not enough of a setback for the company to look abroad.
“45Q is a big part of why we are focused on the U.S. mainly as our deployment site,” Santos explained. “We’ve looked at places like Iceland and the Middle East and Africa for potential deployment locations, and the tradeoff of losing 45Q in exchange for a cheaper something has to be significant enough for that to make sense,” he told me — something like more cost efficient electricity, permitting or installation costs. Preserving 45Q, he told me, means Noya’s long-term project economics are still “great for what we’re trying to build.”
But if companies can’t weather the short-term headwinds, they’ll never be able to reach the level of scale and profitability that would allow them to leverage the benefits of the 45Q credits directly. For many DAC companies such as Climeworks, which built the industry’s largest facility in Iceland, Amador and Stolark said that the domestic policy environment is causing hesitation around expanding in the U.S.
“We are very much at risk of losing our US leadership position in the industry,” Stolark told me. Meanwhile, she said that Canada, China, and the EU are developing policies that are making them increasingly attractive places to build.
As Amador put it, “I think no matter what these projects will be built, it’s just a question of whether the United States is the most favorable place for them to be deployed.”
House Republicans have bet that nothing bad will happen to America’s economic position or energy supply. The evidence suggests that’s a big risk.
When President Barack Obama signed the Budget Control Act in August of 2011, he did not do so happily. The bill averted the debt ceiling crisis that had threatened to derail his presidency, but it did so at a high cost: It forced Congress either to agree to big near-term deficit cuts, or to accept strict spending limits over the years to come.
It was, as Bloomberg commentator Conor Sen put it this week, the wrong bill for the wrong moment. It suppressed federal spending as America climbed out of the Great Recession, making the early 2010s economic recovery longer than it would have been otherwise. When Trump came into office, he ended the automatic spending limits — and helped to usher in the best labor market that America has seen since the 1990s.
On Thursday, the Republican majority in the House of Representatives passed their megabill — which is dubbed, for now, the “One Big, Beautiful Bill Act” — through the reconciliation process. They did so happily. But much like Obama’s sequestration, this bill is the wrong one for the wrong moment. It would add $3.3 trillion to the federal deficit over the next 10 years. The bill’s next stop is the Senate, where it could change significantly. But if this bill is enacted, it will jack up America’s energy and environmental risks — for relatively little benefit.
It has become somewhat passé for advocates to talk about climate change, as The New York Times observed this week. “We’re no longer talking about the environment,” Chad Farrell, the founder of Encore Renewable Energy, told the paper. “We’re talking dollars and cents.”
Maybe that’s because saying that something “is bad for the climate” only makes it a more appealing target for national Republicans at the moment, who are still reveling in the frisson of their post-Trump victory. But one day the environment will matter again to Americans — and this bill would, in fact, hurt the environment. It will mark a new chapter in American politics: Once, this country had a comprehensive climate law on the books. Then Trump and Republicans junked it.
The Republican megabill will make climate change worse. Within a year or two, the U.S. will be pumping out half a gigaton more carbon pollution per year than it would in a world where the IRA remains on the books, according to energy modelers at Princeton University. Within a decade, it will raise American carbon pollution by a gigaton each year. That is a significant increase. For comparison, the United States is responsible for about 5.2 gigatons of greenhouse gas pollution each year. No matter what happens, American emissions are likely to fall somewhat between now and 2035 — but, still, we are talking about adding at least an extra year’s worth of emissions over the next decade. (Full disclosure: I co-host a podcast, Shift Key, with Jesse Jenkins, the lead author of that Princeton study.)
What does America get for this increase in air pollution? After all, it’s possible to imagine situations where such a surge could bring economic benefits. In this case, though, we don’t get very much at all. Repealing the tax credits will slash $1 trillion from GDP over the next decade, according to the nonpartisan group Energy Innovation. Texas will be particularly hard hit — it could lose up to $100 billion in energy investment. Across the country, household energy costs will rise 2% to 7% by 2035, on top of any normal market-driven volatility, according to the energy research firm the Rhodium Group. The country will become more reliant on foreign oil imports, yet domestic oil production will budge up by less than 1%.
In other words, in exchange for more pollution, Americans will get less economic growth but higher energy costs. The country’s capital stock will be smaller than it would be otherwise, and Americans will work longer hours, according to the Tax Foundation.
But this numbers-driven approach actually understates the risk of repealing the IRA’s tax credits. The House megabill raises two big risks to the economy, as I see it — risks that are moresignificant than the result of any one energy or economic model.
The first is that this bill — its policy changes and its fiscal impact — will represent a double hit to the capacity of America’s energy system. The Inflation Reduction Act’s energy tax credits were designed to lower pollution and reduce energy costs by bringing more zero-carbon electricity supply onto the U.S. power grid. The law didn’t discriminate about what kind of energy it encouraged — it could be solar, geothermal, or nuclear — as long as it met certain emissions thresholds.
This turned out to be an accidentally well-timed intervention in the U.S. energy supply. The advent of artificial intelligence and a spurt of factory building has meant that, in the past few years, U.S. electricity demand has begun to rise for the first time since the 1990s. At the same time, the country’s ability to build new natural gas plants has come under increasing strain. The IRA’s energy tax credits have helped make this situation slightly less harrowing by providing more incentives to boost electricity supply.
Republicans are now trying to remove these tax bonuses in order to finance tax cuts for high-earning households. But removing the IRA alone won’t pay for the tax credits, so they will also have to borrow trillions of dollars. This is already straining bond markets, driving up interest rates for Americans. Indeed, a U.S. Treasury auction earlier this week saw weak demand for $16 billion in bonds, driving stocks and the dollar down while spiking treasury yields.
Higher interest rates will make it more expensive to build any kind of new power plant. At a moment of maximum stress on the grid, the U.S. is going to pull away tax bonuses for new electricity supply and make it more expensive to do any kind of investment in the power system. This will hit wind, solar, and batteries hard; because renewables don’t have to pay for fuel, their cost variability is largely driven by financing. But higher interest rates will also make it harder to build new natural gas plants. Trump’s trade barriers and tariff chaos will further drive up the cost of new energy investment.
Republicans aren’t totally oblivious to this hazard. The House Natural Resource Committee’s permitting reform proposal could reduce some costs of new energy development and encourage greater power capacity — assuming, that is, that the proposal survives the Senate’s byzantine reconciliation rules. But even then, significant risk exists for runaway energy cost chaos. Over the next three years, America’s liquified natural gas export capacity is set to more than double. Trump officials have assumed that America will simply be able to drill for more natural gas to offset a rise in exports, but what if higher interest rates and tariff charges forbid a rise in capacity? A power price shock is not off the table.
So that’s risk No. 1. The second risk is arguably of greater strategic import. As part of their megabill, House Republicans have stripped virtually every demand-side subsidy for electric vehicles from the bill, including a $7,500 tax credit for personal EV purchases. At the same time, Senate Republicans and the Trump administration have gutted state and federal rules meant to encourage electric vehicle sales.
Republicans have kept, for now, some of the supply-side subsidies for manufacturing EVs and batteries. But without the paired demand-side incentives, American EV sales will fall. (The Princeton energy team projects an up to 40% decline in EV sales nationwide.) This will reduce the economic rationale for much of the current buildout in electric vehicle manufacturing and capacity happening across the country — it could potentially put every new EV and battery factory meant to come online after this year out of the money.
This will weaken the country’s economic competitiveness. Batteries are a strategic energy technology, and they will undergird many of the most important general and military technologies of the next several decades. (If you can make an EV, you can make an autonomous drone.) The Trump administration has realized that the United States and its allies need a durable mineral supply chain that can at least parallel China’s. But they seem unwilling to help any of the industries that will actually usethose minerals.
Does this mean that Republicans will kill America’s electric vehicle industry? Not necessarily. But they will dent its growth, strength, and expansion. They will make it weaker and more vulnerable to external interference. And they will increase the risks that the United States simply gives up on ever understanding battery technology and doubles down on internal combustion vehicles — a technology that, like coal-powered naval ships, is destined to lose.
It is, in other words, risky. But that is par for the course for this bill. It is risky to make the power grid so exposed to natural gas price volatility. It is risky to jack up the federal deficit during peacetime for so little gain. It is risky to cede so much demand for U.S.-sourced critical minerals. It is risky to raise interest rates in an era of higher trade barriers, uncertain supply shocks, and geopolitical instability.
This is what worries me most about the Republican megabill: It takes America’s flawed but fixable energy policy and replaces it with, well, a longshot parlay bet that nothing particularly bad will happen anytime soon. Will the Senate take such a bet? Now we find out.
Editor’s note: This story has been updated to correct the units in the sixth paragraph from megatons to gigatons.